Peer-to-peer lender Prosper has started a debate over the right of the SEC to regulate – or not – their industry. A relatively new business model, P2P lending is a type of lending that cuts banks out. The SEC calls these companies investment businesses, which means the SEC could regulate them. Prosper is taking action to change this ruling, though.
Article Resource: Peer to peer lending confounds the SEC
The way peer 2 peer lending operates
Peer to peer lending is not entirely unknown – it has been used for microloans to charities within the past. Basically, an investor has direct choice over who they lend money to. Borrowers post requests for loans on the site, including info like their credit score. For as little as $ 25, a lender can contribute to one of these borrowers. Thus far, the two largest U.S. depending p2p lenders are lendingclub.com and prosper.com. On average, these companies claim that investors make around 9 percent on their investments.
Regulations for peer to peer lenders
The lending on peer to peer loan websites are at the moment regulated by the SEC. The argument the SEC uses is that these online lenders are investment firms selling bonds – and therefore fall under the purview of the SEC. To regulate their business, Prosper is asking for the CFPA to have the rights to their business.
The real differences between bonds and loans
Corporations generally use bonds as a type of capital-raising investment. Bonds are a contract that promises payment later as well as easy cash loans. A bond can be traded, exchanged, insured and typically moved around financial markets without much trouble. In comparison to other loans, bonds generally have very low interest rates. Loans are a contract for money now that cannot be traded as easily. Individuals are "sold" loans by banks, while corporations sell banks bonds.
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